As an entrepreneur, it is imperative that you understand the financial markets to better inform your decision making. The financial markets underpin everything you are trying to do as an investor and entrepreneur, so understanding more about it can help provide you with the skills to improve your business decisions while positioning you to maximize profits and manage your risk.
Here is why understanding the financial markets is so essential.
Financial market is considered to be fairly broad, it can be summarized as a market place where traders and investors buy and sell financial assets. There are different financial markets depending on what is traded, such as shares, commodities, bonds, etc. The forex market (where currencies are traded), is the most liquid market in the world, with $5.1 trillion trade in 2016.
Investors, traders and institutions buy these assets primarily for investment purposes with the expectation that the value of their holding will increase over a period of time.
The equilibrium attained between supply and demand is the key element that dictates the prices of each asset. Moreover, that equilibrium is constantly moving as investors, traders and institutions on both sides of the supply and demand sphere react to elements such as data and earnings, which affect their perception of the value of the asset held.
For example, if an investor owns shares in company XYZ, but XYZ reports weaker than expected earnings, this is likely to increase the amount of sellers of XYZ shares, thus the equilibrium between supply and demand changes and forces down the price of XYZ shares.
The Need to Learn More about Financial Markets
By knowing more about financial markets, you can learn more about the underlying factors that influence your ability to make business decisions. Markets can show you long term trends in prices, and can even indicate where those prices might be shifting to in the future. This is great for if you are buying raw goods for your business to sell. By using market data, you can ensure that you buy low and sell high, thereby maximizing profit.
Something as simple as a shares chart or currency chart can tell you a lot about your business and how it is likely to perform going forward. They are also great as you can visually see trends in a matter of seconds.
Market movements or lack of it thereof, can tell you all about the level of supply or demand in your business’s niche. However, it is not just monitoring charts that can help you learn about the markets. Scanning business and reliable news sites can help paint you a picture, too.
Reliable news sites should give you all the information you need to know without the need for detailed market knowledge; especially if you team them with charts, too. This is called technical and fundamental analysis.
In conclusion, the entrepreneur that learns financial market trends is better able to understand its underlying influences and thereby, make better decisions.